Ownership concentration and capital structure: Malaysian evidence - UUM Electronic Theses and Dissertation [eTheses]

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OWNERSHIP CONCENTRATION AND CAPITAL STRUCTURE:

MALAYSIAN EVIDENCE

By:

NURELIANA BINTI BADERI

Dissertation Submitted to

Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia,

in Fulfillment of the Requirement for the Degree of Master of Science (Finance)

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i ABSTRACT

This dissertation investigates the relationship between ownership concentration and capital structure. This dissertation also examines the relationship between firm’s financial characteristics (profitability, firm size, asset tangibility liquidity) and capital structure.

Both objectives are explored by employing 48 Malaysian public listed firms for the period of 5 financial years, spanning from 2008 to 2012.

There are two proxies used to measure ownership concentration; the natural log of total number of shareholders and the fraction of shares hold by the top five largest shareholders. The regression result shows a significantly negative relationship between the fractions of top five shareholdings and leverage ratio, which means that concentrated firms hold lesser debt than dispersed ownership firms. Contradict to agency theory, this finding indicates that MCCG 2012 is still lacking in the area of shareholder’s protection as stated by the World Bank in their recent assessment on MCCG 2012.

By looking at the relationship between ownership concentration and capital structure, this dissertation contributes to literature by investigating the effectiveness of MCCG 2012 in addressing and executing shareholder’s right and protection in Malaysia. In addition, this dissertation also finds that profitability, firm size, asset tangibility, and liquidity are the significant determinants of capital structure for Malaysian firms.

Keywords: ownership concentration, capital structure, corporate governance, shareholder’s rights

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ii ACKNOWLEDGEMENT

Firstly, it is all mercy from Allah that I can finish this paper and I think Allah has indeed make this easier for me as I did not met with many difficulty throughout this study period. I am very grateful to Allah. Second, I want to thanks my supervisor, Dr. Azira Binti Abdul Adzis who is always eager to help me and point out the things that I did not see and think about, with her knowledge and brilliant ideas.

My greatest thanks to my family especially my parents for their love, support and trust in me. They teach me to always put a hard work into everything that I do and to not give up.

My father always told me to be strong, independent women and I hope I am on my way there. My appreciation also goes to all my lecturers for the knowledge and assistance during these two years of my study in Universiti Utara Malaysia. They are not only teaches me academically, but they also teaches me about humility and respect.

I also want to give my thanks to my friends, especially my fellow course mates who are also going through the same things so we understand and continuously support each other. May Allah bless all of these people and may their kindness bring them a blissful life. Again, I am very grateful to Allah.

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iii TABLE OF CONTENTS

PAGE

Abstract i

Acknowledgement ii

Table of Contents iii

CHAPTER ONE INTRODUCTION 1

1.1 Background of the Study 1

1.2 Problem Statement 5

1.3 Research Questions 6

1.4 Research Objectives 7

1.5 Significance of the Study 7

CHAPTER TWO LITERATURE REVIEW 8

2.0 Introduction 8

2.1 Theoretical Review 8

2.1.1 Agency Cost and Agency Theory 8

2.1.2 Trade-off Theory 12

2.1.3 Pecking Order Theory 13

2.2 Empirical Review 14

2.2.1 Determinants of Capital Structure 14 with Malaysian Evidence

2.2.2 Capital Structure and Ownership 17 Structure

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iv

CHAPTER THREE METHODOLOGY 24

3.0 Introduction 24

3.1 Development of the Hypotheses 24

3.1.1 Leverage Ratio and Ownership 24

Concentration

3.1.2 Determinants of Capital Structure 26

3.1.2.1 Profitability 26

3.1.2.2 Firm Size 27

3.1.2.3 Asset Tangibility 28

3.1.2.4 Liquidity 28

3.3 Theoretical Framework 31

3.4 Data and Sample Selection 32

3.4.1 Sources of Data 33

3.5 Data Analysis 34

3.5.1 Variables Measurement 34

3.5.1.1 Ownership Concentration 34

3.5.1.2 Variables Description 35

3.6 Model Specification 37

CHAPTER FOUR RESULTS AND FINDINGS 39

4.0 Introduction 39

4.1 Empirical Analysis 39

4.1.1 Descriptive Statistics 39

4.1.2 Correlation Analysis 41

4.1.3 Multicollinearity Test 44

4.2 Regression Analysis 45

4.3 Theoretical Analysis 50

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v

4.3.1 Profitability 50

4.3.2 Firm Size 51

4.3.3 Asset Tangibility 52

4.3.4 Liquidity 53

4.3.5 Ownership Concentration 54

CHAPTER FIVE CONCLUSION AND RECOMMENDATION 58

5.0 Introduction 58

5.1 Overview of Research Process 58

5.2 Summary of Findings 58

5.3 Suggestion for Future Research 60

REFERENCES 61

LIST OF TABLES

Table 3.1 Variables and the Theory Determination 30

Table 3.2 Variables Description 36

Table 4.1 Descriptive Statistics of Raw Variables 42

Table 4.2 Pearson’s Correlation Analysis 43

Table 4.3 Multicollinearity Test using VIF Method 44

Table 4.4 OLS Regression Estimates for Stage 1 47

LIST OF FIGURES

Figure 3.1 Determinants of Capital Structure Framework 31

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1 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Malaysia was crowned as the regional leader in corporate governance by the World Bank last year. The World Bank in their report stated that Malaysia Code on Corporate Governance 20122 (MCCG 2012) shows a high level of compliance in number of key areas such as the prohibition of insider trading and implementation of high quality accounting standard. Despite the compliment, the World Bank also pointed a few weaknesses in MCCG 2012 and specifically emphasized on the issue regarding shareholder’s right and protection. Observation by the World Bank found that Malaysia has an active market of corporate control where controlling stakes are periodically sold and there are even quite a few cases of proxy fight and hostile takeover (The Star News, March 2013).

Three recommendation regarding shareholder’s right are proposed in the Principle Eight of MCCG 2012. The third recommendation discusses about effective communication and proactive engagements between shareholders, board members and senior management. Board members and senior management are encouraged to have constructive engagements with shareholders about performance, corporate governance and other matters affecting shareholder’s interests. Quite a few cases of proxy fight and hostile takeover as observed by the World Bank put a doubt on the effectiveness of communication between the shareholders and management team. It also shows that the

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